Business Pensions

Thursday 21 June 2018

Women are living longer but falling behind on pensions savings - plans to help them catch up on men are vital

 

Men are almost 40pc better off financially than women in retirement Stock photo: PA
Men are almost 40pc better off financially than women in retirement Stock photo: PA
Louise McBride

Louise McBride

Men are almost 40pc better off financially than women in retirement - making pensions one of the biggest, and probably the most serious, gender investment gaps in Ireland.

The main reason for this huge divide is that many women, despite living longer, are not saving enough into their pensions.

There are a number of reasons women are falling behind on pension savings. Women often earn less than - and as a result, don't have as much to save into their pension as - their male counterparts. Wages in some of the job sectors traditionally dominated by women are often low. Many mothers have taken time out of the workforce - or moved to shorter working weeks - to look after children. Almost seven out of 10 part-time workers are women. All of these things eat into a woman's ability to save for a pension.

Many women will struggle to make ends meet in retirement if they don't address their pension now. Here are some of the key steps women must take to bridge the gender pension gap.

Start a pension

Working women who are not saving into a company pension - even though their employer offers them the opportunity to do so - should join that pension as soon as they can, even if they can only save a small amount into it.

With most company pension schemes, employers pay a contribution into the pension on behalf of the employee. This is an invaluable benefit as it makes it easier for people to build up a reasonable pension for their retirement. You will lose out on this benefit if you're not in the scheme.

You'll also lose out on the benefit of pensions tax relief. One of the most tax-efficient ways to save is to save into a pension. Should you pay income tax at the higher rate, you'll get 40pc tax relief on your pension contributions. It would cost you €60 to save €100 into your pension as a result.

Read more: Women must up their investment game for comfortable retirement

Do it yourself

Not everyone has access to a company pension scheme. Casual and freelance workers, and self-employed contractors, often lose out here as, typically, it is only employees who can join a company pension scheme.

Furthermore, while many large employers offer a company pension scheme to workers, many smaller employers don't. There is no legal obligation on an employer to set up or contribute to a pension scheme. However, your employer must provide you with access to at least one standard Personal Retirement Savings Account (PRSA - a type of personal pension).

So should you not have the option to join a company pension because you are either a freelancer, self-employed, a casual worker - or because your boss simply doesn't offer one, open a PRSA or a personal pension and save what you can into it. Should you wish to open your own pension but have no expertise in pensions, a standard PRSA is probably your easiest option.

A standard PRSA is one of the two types of PRSAs available; with non-standard PRSAs being the other option. The main difference between a standard and non-standard PRSA is there is a limit on the charges you pay on a standard PRSA. There is no such limit on non-standard PRSAs - though this doesn't mean the charges on a non-standard PRSA will always be higher than on a standard PRSA. Should you be investing in property or direct stock through a non-standard PRSA, the charges will typically be higher than a standard PRSA, according to Sinead McEvoy, pensions technical solution manager with Standard Life.

Non-standard PRSAs usually offer a greater choice of investment funds than non-standard ones though it would be important to be investment-savvy - or in receipt of good independent financial advice - if considering a non-standard PRSA. Otherwise, you may be taking a bigger risk with your pension savings than you think.

Read more: 'Worrying' lack of adequate financial protection for women in Ireland - research

There are a number of advantages to PRSAs for those on low or irregular incomes (as is often the case with casual, freelance or part-time workers). The minimum which must be paid into a PRSA a year is only €300. You don't have to make regular payments into a PRSA and you can stop, start, increase or decrease your contributions at any time without incurring a charge for doing so - though you must usually give your PRSA provider a certain amount of notice if doing so.

Be realistic though - only commit to a PRSA if you can afford to do so, because if you do not pay contributions for two years or more and the value of your PRSA fund is €650 or less, your PRSA provider can terminate your PRSA and give you a refund of the value of your account.

"PRSAs were very much created with simplicity and flexibility in mind," said John McInerney, pensions technical manager with Aviva.

"Every PRSA must have a default investment strategy so if you don't want to choose the investment funds that your pension is invested in - due to lack of experience or expertise, you can go with the default strategy.

"That strategy will usually be a well-diversified fund [where your money is invested in a range of investments] or a lifestyling fund [where your money is invested in risky assets when you are young and moved into less risky investments as you approach retirement]."

A personal pension plan (PPP) could be a better option for you than a PRSA. "Sometimes PPPs have lower charges, depending on the fund you're investing in - and the financial adviser," said McEvoy. PPPs will typically offer a better choice of investment funds than PRSAs - though charges may not be as transparent with PPPs.

Part-timers

Part-time workers must get the same access to a company pension as a comparable full-time employees, unless the part-timer is working less than a fifth of the normal working hours of the full-timer.

It may be a financial struggle for a part-time worker to pay into a pension - because their earnings are usually low.

Part-time workers might also be at a disadvantage with pensions tax relief because if only earning enough to pay the standard 20pc rate of income tax, they only qualify for half the tax breaks of a worker on the higher tax rate. Even at half the rate though, these tax breaks are valuable.

Don't stop paying into a company pension scheme if you move from full-time to part-time work. Reduce your contributions if you can no longer afford to pay what you paid before - but continue to pay into the scheme.

Should you be a part-time worker who can, but has not yet, joined a company pension scheme which your boss contributes to, join the scheme - even if you can only afford to save a small amount. It will be easier to build up a reasonable pension with the support of an employer contribution than if saving for retirement on your own.

Make up lost time

Should you be returning to the workforce after a number of years looking after children, save as much as you can into your pension - to make up for the time you have lost paying into it.

Make Additional Voluntary Contributions (AVCs - extra contributions paid to an employer pension scheme to build up an additional retirement fund) if you can afford to do so.

Regardless of whether you are paying AVCs or not, try to increase the amount you pay into your pension as you get older - though be careful not to contribute more than you are entitled to get pensions tax relief on.

"Put away a constant proportion of your earnings," said McEvoy.

"As your pay increases, make sure your contributions increase proportionately, or you'll fall behind. Each time you get a pay rise, put a quarter of it into your pension each month," McEvoy added.

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